The peaking of world oil production presents the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Organizations must continuously devise strategies and re-structure them to make them compatible with changing time for timely mitigation of risks.

Risk management is of paramount importance for the fruitfulness of investments in the oil and gas industry where investment in one project alone can be in the billions of dollars, and take many years to complete. There is no guarantee of returns in any particular project as even after the rigorous drilling efforts the prospect may be devoid of hydrocarbons. For this purpose, adequate risk return evaluation in this sector is very important.

Most risks, except political risk, can be minimized by using an array of technological tools. Political risk is presumed to be beyond the control of the investor. However, for the Energy sector, political risk management plays an increasingly important role since the oil and gas production pattern worldwide is directly related to the geopolitical location of reserves. As shown below, major oil reserves are located in the regions of the world characterized by an unstable political environment.

  Middle East    65.7%
  Commonwealth of Independent States and Eastern Europe    5.9%
  Western Europe    1.6%
  Latin America    12.3%
  North America    3.9%
  Asia and Pacific    4.4%
  Africa    6.1%

(Source: Managing Political Risk in the Oil and Gas Industries; Oil, Gas &
Energy Law Intelligence; Volume 1 – Issue #02 March 2003)

If planning on investing internationally, it is important to consider the political risk represented by the host country. When evaluating a prospective investment in a foreign country, the investor must also evaluate and manage the potential political risk in addition to the geological and market risks. In other words, an oil company must be able not only to find hydrocarbons, it must also be able to develop and produce those hydrocarbons at a reasonable profit over time. An agreement signed with the host government is likely to last for several years, often outlasting the duration of the current government in power. The succeeding government may be less receptive towards foreign companies and adopt a more nationalist policy to preserve their national resources.
Another risk faced by the Oil & Gas industry is the growing focus on environmental issues. Major Energy companies are now establishing strategies for sustainable development to mitigate this risk and are aiming to develop their worldwide activities accordingly.

Further, the risks that are unique to this sector are ageing assets, lack of talented employees, unpredictable outcome of large investments, and operational risks such as ultra-deepwater development.

Risk management is fundamental to the success of a major project. However, there are lots of variations in risk management that are dependent on numerous factors such as the industry sector, the size of the project, and the stage in the project life cycle. One of the major factors that contribute to the success of risk control is the use of risk response techniques. The exact risk return ratio calculation for the oil & gas sector is not possible but it could be minimized or managed to some extent.

No amount of planning or management will make a project immune to risks but at times, it could make all the difference between the success and failure of a project.

- The Global Energy Talent Editorial Team